A Tax from Governing's Past

In my April feature story, I said that the question of why sales taxes generally apply to goods but not services is "one of ...

In my April feature story, I said that the question of why sales taxes generally apply to goods but not services is "one of the great perennial debates in state tax policy."

To come to that conclusion, I didn't need to make any phone calls or conduct any research. I just needed to look at the giant replica of Governing's first cover that is on the wall of our office.

As you can see, toward the bottom it asks, "Florida's New Tax: Is It Contagious?"

In October 1987, Florida's new tax was a broadened sales tax that applied to most services. If you read the article, you'll realize a couple of things:

--Governing articles used to be REALLY long.

--The issues I was writing about this year are quite similar to the ones people were debating 23 years ago.

Here's a key paragraph from that article:

Whatever the outcome of the repeal effort, the subject of a special legislative session that began Sept. 21, both advocates and critics say the debate is far from over -- in Florida and elsewhere. Simple economics -- the need for additional revenues in many states and the attractiveness of the expanding service industries as a base for such revenues -- will keep the issue alive and heated.

I could have written pretty much the same thing (without the repeal part) and replaced Florida with Kentucky or Pennsylvania or Michigan. And, that raised a tough question for me as I wrote this story: If I could have written the same thing 23 years ago, why was the topic worth revisiting?

I had two answers to that question. One is that something new is going on. State budget situations have become so bad that lots of states are raising taxes. According to the National Association of State Budget Officers, states collectively raised taxes and fees by $23.9 billion for the 2010 fiscal year, the largest increase of the last 20 years. In that context, expanded sales taxes seem more plausible. Here's what I wrote:

Why are all these proposals coming at once? It's not that taxing services has become any less politically perilous. It's just that in the present fiscal environment, every budget decision that state lawmakers make comes with political risk. If the alternatives are angering voters by raising taxes or angering voters by cutting funding for popular programs, suddenly expanding the sales tax doesn't look like such a bad deal. If every state broadened its sales tax, states would collectively raise tens of billions of dollars. Many states would have enough money to plug their current budget holes and mend their structural deficits.

My second answer to that question, though, is that the debate over taxing services is a worthy topic because the situation has changed so little. Most economists say that sales taxes should apply to services. They've been saying that for decades. But, state policymakers still aren't listening.

One of the reasons they aren't listening is what happened in Florida 23 years ago. The tax was repealed. Florida Gov. Bob Martinez lost his reelection bid. Florida's new tax not only wasn't contagious -- it turned out to be one of the biggest reasons why states have avoided expanding their sales taxes ever since.